Australia should plan for worst-case housing falls: OECD

Australia must be prepared for a hard landing in the housing market that could cause financial instability and hamper economic growth, a global forum has warned.

‘The market has started to cool over the last year, with prices falling most notably in Melbourne and Sydney’

The Organisation for Economic Co-operation and Development's latest assessment of Australia points to elevated levels of household debt after years of booming prices.

But house prices have fallen since late 2017 and while the market was on track for a soft landing, the risk of a hard landing remained and regulators should be ready for the fallout.

"Financial supervisors and bank regulators should be prepared in the event of a hard landing in the housing market," the Paris-based group said in a report released today.

"A large drop in house prices could cut household consumption, prompt collapse in the construction sector, increase mortgage defaults and freeze back lending to businesses."

An aerial image of waterfront properties in Sydney (AAP)

Philip Hemmings, the head of Australia Desk for OECD Economics Department, concluded Australia's housing market is "a source of vulnerability", according to his analysis of the wide-ranging report.

"[Property] prices have more than doubled in real terms since the early 2000s and household debt has surged," he writes.

"The market has started to cool over the last year, with prices falling most notably in Melbourne and Sydney. So far, data point to a soft landing without substantial consequence for the overall economy. Nevertheless, risk of a hard landing remains."

Mr Hemmings observed the decrease in Australian house prices had so far been gradual. Citing IMF data which bolstered the case for a soft landing, there was evidence to suggest Australia's house prices "have not been hugely overvalued".

But he cautioned a macroeconomic downturn from the cooling housing market remained a legitimate risk.

"Not withstanding the estimates that Australia's market is not greatly overvalued, house prices could fall more substantially," Mr Hemmings warned.

"Should this happen, household consumption could weaken. Households would cut their spending due to lower housing wealth and … increased economic uncertainty generated by downturn."

Mr Hemmings also predicted a sustained decrease in house prices would also weaken construction activity. That could lead to losses on loans to businesses, putting stress on the financial sector.

The latest auction data from CoreLogic has underlined the dip in Australia's property market.

Last week 2614 homes were taken to auction in capital cities, down from 3371 this time last year. Preliminary clearance rates of 45.3 percent are significantly lower than 59.5 percent recorded one year ago.

(9News)

The OECD report also found that about 13 percent of Australians live in households with incomes below the poverty line – less than half of the median household income.

Although poverty in old age has declined in the last 15 years, in Australia it nevertheless remains high. Old people in Australia have more than 30 percent chance of living in poverty, which is a high figure compared to other countries.

Meanwhile Treasurer Josh Frydenberg used the OECD report's warning on the property market to attack the Labor opposition over its policy to rein in negative gearing tax breaks for housing investment.

"They will damage Australia's housing market and destroy the equity that people hold in their homes, increasing the risk of financial instability and lower economic growth," Mr Frydenberg said in a statement today.

Regulators should also turn their attention to ensuring accountability, transparency and competition among financial institutions after the banking royal commission, the OECD recommended.

But the agency has found life in Australia is ultimately rosy as its long span of economic growth - 27 consecutive years - continues.

"Life is good, with high levels of well being, including health, and education," the group said in its latest Australian economic survey.

Aside from the housing market, the agency said risks to the growth outlook include uncertainty around export demand - due to rebalancing in China - and the potential escalation of global trade tensions.

Challenges in boosting productivity - which involves increasing the value derived from the work and resources put into the economy - are also a risk.

The OECD, which has 36 member nations, has called for interest rates to be gradually lifted as growth continues and inflation slowly rises.

The Reserve Bank of Australia has kept the official cash rate at its record low of 1.5 per cent since August 2016 and has signalled that's not likely to change for some time.

The OECD has also recommended that the federal government maintain fiscal discipline, bringing the budget back to surplus and building on the result by bucking pressure to lift public spending.

The Liberal-National government has vowed to deliver a surplus in its next budget in April.

Although Australia has demonstrated a "remarkable capacity" to increase living standards and absorb economic shocks, the OECD has stressed socio-economic challenges remain.

Some groups of people are vulnerable as they face low workforce participation and a high risk of poverty, the agency said.

The nation's climate change policy also still lacks clarity and stability, the organisation said.